Shell Withheld Reserves Data To Aid Nigeria

By JEFF GERTH and STEPHEN LABATON

Published: March 19, 2004

WASHINGTON, March 18—
The Royal Dutch/Shell Group has kept secret important details of its sharp reduction in oil and gas reserves, particularly in Nigeria, for fear of damaging its business relationship with the government there and the Nigerians' desire to produce more oil, internal company documents show.

While Shell has acknowledged that the biggest adjustments in reserves include those in Nigeria, it continues to conceal the extent of its problems. But confidential documents from late last year show Shell concluded that more than 1.5 billion barrels, or 60 percent of its Nigerian reserves, did not meet accounting standards for ''proven reserves.''

The scale of the revision is important because Nigeria is a significant source of oil for Shell and the country is seeking to increase markedly its production quota within the Organization of the Petroleum Exporting Countries. The size of proven reserves is a basic consideration when OPEC sets quotas for its members. At stake for Nigeria are billions of dollars in revenue annually.

Shell disclosed two months ago that it had overstated its oil and gas reserves by 20 percent, which is equivalent to 3.9 billion barrels of crude oil. On Thursday, it pared its reserves by the equivalent of 250 million barrels more, most of that involving a natural gas field off Norway. Shell also postponed the publication of its 2003 annual report for two months to complete a review of its oil and gas assets. [Page C1.]

The oil company's executives are acutely aware of the potentially explosive political effect of their cutting the estimates of Nigerian reserves. A report dated Dec. 8, 2003, and prepared for senior executives

by Walter van de Vijver, then the top official for exploration and production, recommended that the revised Nigerian reserves remain ''confidential in view of host country sensitivities.''

Nigeria is the world's seventh-largest oil exporter, producing about two million barrels a day, and shipping 40 percent of that to the United States. Shell documents about Nigeria portray a sometimes fragile marriage and offer a window into the kind of relationship that is considered vital to global energy security.

Most of the world's oil is in less-developed countries like Nigeria, yet much of the financial and technological resources needed to develop that oil belong to Western oil companies.

Authorities in the United States, Britain and the Netherlands have each opened investigations into Shell's actions, to see if the company violated any laws or securities regulations.

By reducing its estimates of reserves, Shell has not necessarily lost any oil or gas. Instead, it reclassified some oil and gas fields as less likely to be developed soon, if at all. Timing is important to investors because it suggests how much money the company can make over certain periods and how busy it can keep its refineries.

Reserves are also important to Shell because they can influence the company's relationship with the country where the oil and gas are found. This is particularly true in Nigeria.

Identifying the extent of Shell's lowered reserves in Nigeria, Africa's most populous nation, could affect Nigeria's ''quota discussions'' with OPEC, the December report warned. Nigeria has been seeking a quota increase as part of a plan to double its daily production in the next several years.

Reserves are ''a key input in quota discussions,'' the report says, and since Shell's reserves constituted about half the country's total, ''an external disclosure indicating that estimates have been overstated could negatively impact the government's position.''

OPEC officials visited Nigeria last month and the organization will discuss a new formula for determining quotas later this year, an OPEC spokesman said. Proven reserves, the spokesman said, were part of the quota calculation. Oil yields 90 percent of Nigeria's export revenue, which was estimated at $17.3 billion a year in 2002. A doubling of its production, as it intends, could mean billions extra in annual income.

Andy Corrigan, a spokesman for Royal Dutch/Shell, the world's third-largest publicly traded oil company, declined to provide details on Thursday about the restated Nigeria reserves, saying only that they constitute a ''significant proportion'' of the overall calculations.

E.E. Imohe, the head of the economic section at the Nigerian Embassy in Washington, said Thursday that he passed on questions from a reporter to his government this week about Shell, but had not yet received a reply.

Protecting Nigeria's negotiations with OPEC may not be the only reason Shell has not been more forthcoming about its reserves there. The report said the publication of too much information could jeopardize the company's negotiations with Nigeria over $385 million in bonus payments.

In any case, the documents about Nigeria offer a far bleaker assessment of Nigerian operations than the company's public disclosures.

Nigeria, for example, has called for an end to the practice of flaring, or burning off, natural gas that is a byproduct of oil production; two billion cubic feet of natural gas are burned this way in Nigeria every day, and this has become an environmental and political issue. Mr. Corrigan said the company was committed to meeting the target. Shell's Web site says ''this opportunity'' to gather gas ''is going well.''